The Reserve Bank of India’s (RBI) draft guidelines on amending the regulatory framework for banks to undertake various permissible forms of business will, if implemented in toto, necessitate reorganisation of the lending business of bank groups (banks and their group entities¹).

The impact of such reorganisation, however, will likely be less than 6% of the consolidated advances of individual banks², a study by Crisil Ratings covering 32 public and private sector banks that comprise ~95% of the total advances of the Indian banking system indicates.

The draft guidelines suggest two key changes that could have an impact on the structure or functioning of the lending businesses of bank groups. First, only a single entity within a bank group can undertake a particular form of permissible business, and multiple entities shall not undertake the same business or hold/acquire the same category of licence, authorisation or registration from any financial sector regulator³. Second, there can be no overlap in the lending activities undertaken by the bank and its group entities.

Banks will get two years from the date of the final circular to comply with these norms.

There are 3 key takeaways from the Crisil Ratings’ study:

• Of the 32 banks, 20 banks comprising ~40% of banking sector advances will not be impacted by these guidelines, either because they have no operational group non-banking financial company (NBFC) or housing finance company (HFC), or because these group entities are carrying out lending businesses that are not undertaken in the bank and are explicitly listed as permitted to be carried out in a separate entity⁴.
• Of the remaining 12 banks, accounting for ~55% of sector advances, 9 have NBFC or HFC subsidiaries, while the rest hold stake only in associate entities. The proposed guidelines do not distinguish between the two categories.
• For these 12 banks, the share of impacted assets under management (AUM)⁵ is limited to less than 6% of the individual bank’s consolidated AUM in most cases, which is not large.
  

Says Ajit Velonie, Senior Director, Crisil Ratings, “The proposed RBI norms effectively mean that bank groups where two or more entities are in similar lending businesses will need to consolidate their operations into one entity. In the bank groups analysed, this issue was only with lending entities under the NBFC-Investment and Credit Company (ICC) category. Also, in cases where the bank and group NBFC/HFC operate in similar asset classes, even if they cater to different customer segments, the choice may need to be made to consolidate in either entity.”

That said, this is a draft circular and the final reorganisation that banks may need to undertake will depend on the fine print of the final circular. One important element is whether group NBFCs can continue lending businesses that are mutually exclusive with those of banks, but not explicitly listed as permitted to be carried out in a separate entity⁴.

The draft guidelines also indicate that a group entity may not carry out any business activity that is not permitted in banks. Crisil Ratings understands that NBFC/HFC subsidiaries of banks are already compliant with this norm. However, if an associate lending entity is undertaking activities not permitted in the bank, it may need to discontinue it.

Says Subha Sri Narayanan, Director, Crisil Ratings, “The presence of a group NBFC/HFC allowed banks to cater to differentiated customer segments in a cost-effective manner. Hence, their ability to manage any potential business reorganisation in a seamless and operationally efficient manner will be important. While there may be a temporary business impact linked to operational integration, Crisil Ratings does not foresee any material impact on the credit profiles of the banks from implementation of these guidelines. As for the NBFCs / HFCs, it will be important that any reorganisation is carried out in an orderly manner to minimize the disruption caused due to the transformation.”

¹ Group entity has been defined in the draft circular as associate/ joint venture/ subsidiary
² For banks where there is an impact
³ While this is applicable to all businesses, the Crisil Ratings’ study covers only the lending business
⁴ Guidelines state that the core lending business/ activity should be undertaken by the bank itself, but banks will have the freedom to undertake certain businesses, such as factoring, primary dealership, credit card business, housing finance, equipment leasing and hire purchase, either departmentally or through a separate group entity (associate/ joint venture/ subsidiary), subject to certain conditions
⁵ Impacted AUM is calculated as AUM of the NBFCs/HFCs in asset classes that are common with the bank